Q3 2022 Smart Sand Inc Earnings Call

November 9, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Good day, and thank you for standing by and welcome to the third quarter 2022, Smart Sand earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star.

One one on your telephone please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Chris Green Corporate controller. Please go ahead.

Good morning, and thank you for joining us for Smart Sand's third quarter 2022 earnings call on the call today, we have Chuck Young founder and Chief Executive Officer, Lisa <unk>, Chief Financial Officer, and John Young Chief operating Officer.

Before we begin I would like to remind all participants that our comments made today will include forward looking statements, which are subject to certain risks and uncertainties that could cause actual results or events to materially differ from those anticipated.

For a complete discussion of such risks and uncertainties. Please refer to the company's press release and our documents on file with the SEC.

Our standard claims any intention or obligation to update or revise financial projections or forward looking statements, whether because of new information future events or otherwise.

This conference call contains time sensitive information that is accurate only as of the live broadcast today November nine 2022.

Additionally, we will refer to non-GAAP financial measures are contribution margin adjusted EBITDA and free cash flows during this call.

These measures when used in combination with our GAAP results provide us and investors with useful information to better understand our business. Please.

Please refer to our most recent press release and our public filings for a reconciliation of gross profit contribution margin.

Income to adjusted EBITDA and cash flow provided by operating activities to free cash flow I would now like to turn the call over to our CEO shutdowns.

Thanks, Chris and good morning.

In the third quarter smart sand delivered sales volumes of $1 1 million tons, $17 $8 million and contribution margin and $11 million and adjusted EBITDA.

This is our highest contribution margin and adjusted EBITDA since the second quarter of 2020.

Year to date through September we have sold $3 2 million tons, we are on pace to sell record volumes in 2022.

During the quarter, we generated positive free cash flow of $6 4 million and.

Our strong financial performance in the quarter continues to demonstrate the value of our business model to deliver high quality northern white sand sustainably inefficiently from the mine to the well site.

We also remain committed to maintaining a strong balance sheet that will provide us the long term durability to operate successfully through any operating cycle.

In the third quarter, we saw strong activity in all of the operating basins that we currently serve pricing in the quarter improved and we expect to maintain current pricing levels based on expected continued strong market supply and demand fundamentals.

Our unit train capable trans loading terminals in Waynesboro, Pennsylvania, and van Hook, North Dakota continues to demonstrate the value of our long term focus of delivering bulk commodities on rail and a sustainable and sufficient fashion to our customers.

Sales volume into the Bakken basins served by our van Hook terminal increased by approximately 40% sequentially.

We typically see a slowdown in activity in van hook into fourth quarter due to weather and budget management by our clients. However, this seasonal slowdown looks to be balanced out this year with increased activity through our waynesboro terminal into the Marcellus.

Having multiple terminals allows us greater flexibility to switch supply to meet changing market demands.

Utilization of our smart systems last mile offering continues to improve we are gaining momentum as we start to penetrate the market with our smart power technology.

Year to date through September our smart systems have generated positive contribution margin and going forward, we expect it to deliver improved financial performance.

By using our smart pass our customers can reduce the number of trucks needed to deliver sand to the well site up to 30% versus our competitors' equipment, providing our customers with substantial cost savings for sand delivered to the wellhead.

Additionally, by taking trucks off the road, we benefit our communities by reducing accidents carbon emissions noise and dust.

ESG goals are important to smart sand and its customers and smart systems helps to achieve those goals by improving efficiency and reducing impact.

Our <unk> mine to well site rail terminal and last mile approach provides our customers a safer cost efficient and more reliable supply chain.

We continue to see improvements in our industrial product solutions division with our industrial sales volume increasing 28% in the quarter.

Industrial product solutions as a long term commitment to diversify our business beyond oil and gas and to more effectively utilize our asset base. It will take time to build this business, but we are taking steps needed now to satisfy strong growth in this business segment in 2023 and beyond.

Our balance sheet remains strong today, we have approximately $5 million in cash on our balance sheet and approximately $20 million in liquidity.

We will continue to remain disciplined with capital spending while pursuing projects that will generate long term value.

We are excited about our future for a number of reasons are.

Our high quality asset base, we have over 400 million tons of northern White sand reserves and current annual processing capacity of $7 1 million tonnes.

Over the last two years for the acquisition of Utica in 2020, and Blair earlier. This year, we have developed the capability to flex our annual northern white capacity from $5 5 million tons to 10 million tons, thus, adding $4 5 million tons of capacity for a very low acquisition cost of approximately $9 million.

We brought $1 6 million tons of that flex capacity online in late 2020, when we opened our Utica facility.

We're actively evaluating the timing of opening the Blair facility and expect to have additional information on this on our year end earnings call in March this incremental capacity strategically positioned smarts and to take advantage of the growing market demand for northern white sand.

Our reserve base is primarily finer mesh sands.

To meet the long term needs of the market our facilities, our low cost efficient operations that allow us to operate effectively through all market cycles.

Our strategically located in basin terminals, our terminals in van Hook, North Dakota, and Waynesboro, Pennsylvania are located in the heart of the Bakken and Marcellus basins, which gives us a competitive advantage to effectively compete in these basins for years to come.

Our superior last mile offering we believe our smart systems technology provides superior and sustainable well site sand storage management for our customers and we expect this business to start delivering improved contribution margins going forward.

Our growing industrial sand solutions business. This business segment continues to grow rapidly diversifying our business with strong margins.

As always we will continue to keep our eye on the future and we will always keep our employee and shareholders' interest in mind in everything we do and with that I'll turn the call over to our CFO Lee back on it.

Thanks, Chuck now I'll go through some of the highlights of the third quarter, starting with sales volume.

We sold approximately $1 million 110000 tons in the third quarter, a 7% decrease over the second quarter volumes of $1 million 196000 tons.

Volumes during the third quarter were slightly lower sequentially due primarily to the timing of well completions have some of our customers' overall activity levels continue to be at high levels.

Revenues for the third quarter, 2022, or $71 6 million compared to $68 7 million in the second quarter.

Total revenues were higher in the third quarter due primarily to continued improvement in average sales prices of our sand.

<unk> utilization of our smart systems fleet.

$2 $7 million in contractual shortfall revenue.

Our cost of sales for the quarter was $60 2 million.

<unk> to $59 7 million last quarter remaining relatively consistent period over period, but nothing significant to call out.

Total operating expenses were basically flat at $7 7 million in the third quarter compared to $7 6 million last quarter.

Net income was $2 7 million for the third quarter or <unk> <unk> per basic and diluted share compared to a net loss of 90000 or zero cents per basic and diluted share for the second quarter 2022.

For the third quarter of 2020 to contribution margin was $17 8 million and adjusted EBITDA was $11 3 million.

Impaired to second quarter contribution margin of $15 3 million and adjusted EBITDA of $9 $2 million to.

The increase sequentially was primarily due to shortfall revenue recognized in the third quarter.

For the third quarter contribution margin per ton was $16 one per ton compared to $12 75 per ton last quarter.

For the third quarter 2022, we generated $10 8 million in net cash provided by operating activities, leading to $6 4 million and free cash flow. After we spent $4 4 million on capital expenditures.

During the third quarter, we drew an additional $3 million on our revolver and ended with $6 million outstanding on our facility.

We ended the quarter with approximately $10 4 million in cash and cash equivalents.

Between cash and our availability on our facilities. We currently have approximately $23 million in available liquidity.

In terms of guidance for the fourth quarter, we expect sales volumes to be in the 1 million to $1 $2 million range. Our sales volumes in the fourth quarter can be impacted by weather and customers managing year end budgets, leading to completions activity potentially being delayed into 2023 and could result in lower sales volumes sequentially.

Due primarily to timing of completions activity shifting from this year into 2023.

We expect adjusted EBITDA to be positive in the fourth quarter, but it will likely be lower than third quarter results as we will not recognize any shortfall revenue in the fourth quarter.

For the full year 2022, we expect to have record sales volumes for the company.

We believe our contribution margin per ton.

We remain in the double digit range in the fourth quarter.

We still expect capital expenditures for the year to be in the $20 million to $25 million range, which includes capital expenditures.

And the acquisition of the Blair facility earlier in the year.

This concludes our prepared comments and we will now open the call for questions.

Thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Yeah.

Our first question comes from Stephen <unk> from Stifel. Your line is open.

Thanks, Good morning, everybody.

Good morning, Steven.

Two questions for me first can you give us your perspective currently on the supply demand fundamentals for Frac sand as we as we look out into 2023.

Yes, sure David So.

Now northern white supply and demand fundamentals continue to be positive demand appears to be growing a little bit, particularly in the Appalachian basin, primarily a gas.

Drilling market, we expect the Bakken the western basis remained steady.

Other than the seasonal fluctuations due to potential weather here in the fourth quarter and first quarter.

We're not seeing a lot of northern new northern white sand supply come back online.

Some pockets of incremental supply.

But with some of the capital constraints out there.

And of course, the reserves of most of the idle mines with the inefficient processing of that yields.

We don't see much if any of that capacity returning.

Current pricing and margin levels.

The only other thing I'd add is yes.

This year has kind of been the first time in a long time for as long as I can remember that we've seen both high commodity price on Nat gas and oil and so those two things are.

Generating.

Activity in both of those basins high activity in both of those basins or types of basins and we haven't seen that in the past generally in the past it would have been high oil low gas or vice versa. So that's kind of an interesting market demand that I don't know we've been talking about a lot.

Great. Thank you.

Thank you you mentioned.

I believe double digit contribution margin per ton in the fourth quarter.

Thats.

Yes.

Pretty strong number given I think what is normal normally some cost some winter cost.

Cost of goods sold increases can you just kind of is that driven by just the efficiency of the system and the price dynamics you've seen over the last.

Over the last year.

<unk> allows you to.

Hold it at that level.

A softer fourth quarter.

Yes, Stephen I think a couple of things are driving that we're seeing.

We're guiding to volumes have been relatively consistent in the fourth quarter versus typically we have a little bit of a drop off of our filing is to absorb our fixed cost.

Better in the fourth quarter, we normally do.

And so that's helping and then also we're seeing pricing I think kind of stabilize at current level. So we see kind of pricing remaining at good levels. So the combination of having.

Consistent volumes in the fourth quarter versus more of a drop off than we've seen in the last couple of years, coupled with a good pricing environment I think leads us to feel confident that will be.

And contribution margin per ton levels that you saw in the second quarter in the third quarter.

Even backing out the shortfall revenue for the third quarter number.

Great.

That's helpful. Thank you for the color.

Okay.

Thank you and we have a question from.

One moment.

From Brian Shea Lee with exploit investing your line is open.

Hi, there. Thank you for having me on.

First a question for.

Do you still next quarter expand in any given quarter. For example that you felt like quarter for staying in quarter three.

Excuse me that we sell what.

Next quarter, saying in any given quarter.

For example, like in the quarter.

Do you sell a quarter horse and in quarter, three and does that differ when you have contracts.

I'm not sure I understand your question, we sell sand based on the.

Activity in each quarter and those volumes get booked in that quarter. So there.

Ever sales, we have in Q3 or from volumes, we sold in Q3 and whatever sales we have in Q4 et cetera from volume as we sold in Q4.

Okay. Thanks.

The question was basically.

Like do you actually sell the sand.

Like have you actually increase the number of.

People you have on contract. So are you able to see into the next quarter, how much volume you could possibly have.

And have you actually increase the number of people you have on contract.

Yes, we've added a couple of smaller contracts and so we don't disclose actual the percent of contracts, we have outstanding but we have added.

Couple of smaller contracts.

We will have.

Volumes associated with them starting in the fourth quarter and first quarter next year.

But.

We have our current contracts in place and then we do have pretty good visibility with our spot customers in terms of working with them to know kind of where their volumes are going to be on a on a monthly and quarterly basis.

Sure.

Okay. Thank you.

One more so you're your stock currently trading at an enormous discount to our net tangible asset value.

Into next year are you looking at possibly implemented.

Aggressive shareholder return program.

I think thats something we will continue to evaluate right now as you saw in our numbers, we've got to positive free cash flow this quarter, and we anticipate being able to kind of continue that trends and once we see and are confident in terms of our cash flow being consistent and being positive cash.

So then we will evaluate.

The opportunities we have in terms of thinking about providing returned to shareholders through dividends or other measures. So it's still a little early for that but that's something we will evaluate and we will as we get into 2023, we will we'll have more discussion on that depending on how overall activity is what free cash flow, we're generating and the consistency of that cash flow.

Alright, thank you.

Thanks, Brian Thank you.

Thank you and Thats all the questions I've had like to turn the call back over to Chuck Young for any closing remarks.

Thank you for joining us today, we look forward to talking with you again in March.

Sure.

This.

Today's conference call. Thank you for participating you may now disconnect.

[music].

Conference is being recorded I would now like to hand, the conference over to your speaker today, Chris Green Corporate controller. Please go ahead.

For a complete discussion of such risks and uncertainties. Please refer to the company's press release and our documents on file with the SEC.

Roxanne disclaims any intention or obligation to update or revise financial projections or forward looking statements, whether because of new information future events or otherwise.

This conference call contains time sensitive information that is accurate only as of the live broadcast today November nine 2022.

Additionally, we will refer to non-GAAP financial measures are contribution margin adjusted EBITDA and free cash flows. During this call. These measures when used in combination with our GAAP results provide us and investors with useful information to better understand our business. Please.

Please refer to our most recent press release and our public filings for a reconciliation of gross profit contribution margin.

Income to adjusted EBITDA and cash flow provided by operating activities to free cash flow I would now like to turn the call over to our CEO shutdowns.

Thanks, Chris and good morning in the third quarter Smart sand delivered sales volumes of $1 1 million tonnes.

$17 8 million in contribution margin and $11 million and adjusted EBITDA. This is our highest contribution margin and adjusted EBITDA since the second quarter of 2020.

Year to date through September we have sold $3 2 million tons, we are on pace to sell record volumes in 2022.

During the quarter, we generated positive free cash flow of $6 4 million.

We also remain committed to maintaining a strong balance sheet that will provide us the long term durability to operate successfully through any operating cycle.

Our unit train capable trans loading terminals in Waynesboro, Pennsylvania, and van Hook, North Dakota continue to demonstrate the value of our long term focus of delivering bulk commodities on rail and a sustainable and sufficient fashion to our customers.

Sales volume into the Bakken basins served by our van Hook terminal increased by approximately 40% sequentially.

Having multiple terminals allows us greater flexibility to switch supply to meet changing market demands.

Utilization of our smart systems last mile offering continues to improve we are gaining momentum as we start to penetrate the market with our smart power technology.

Year to date through September our smart systems have generated positive contribution margin and going forward, we expect it to deliver improved financial performance.

By using our smart path, our customers can reduce the number of trucks needed to deliver sand to the well site up to 30% versus our competitors' equipment, providing our customers with substantial cost savings for sand delivered to the wellhead.

Additionally, by taking trucks off the road, we benefit our communities by reducing accidents carbon emissions noise and dust.

ESG goals are important to smart sand and its customers and smart systems helps achieve those goals by improving efficiency and reducing impact.

Our <unk> mine to well site rail terminal and last mile approach provides our customers a safer cost efficient and more reliable supply chain.

We continue to see improvements in our industrial product solutions division with our industrial sales volume, increasing 28% in the quarter industrial product solutions as a long term commitment to diversify our business beyond oil and gas and to more effectively utilize our asset base.

We'll take time to build this business, but we are taking steps needed now to set us for strong growth in this business segment in 2023 and beyond.

Our balance sheet remains strong today, we have approximately $5 million in cash on our balance sheet and approximately $20 million in liquidity we.

We will continue to remain disciplined with capital spending while pursuing projects that will generate long term value.

We are excited about our future for a number of reasons are.

Our high quality asset base, we have over 400 million tons of northern White sand reserves and current annual processing capacity of $7 1 million tonnes.

Over the last two years with the acquisition of Utica in 2020, and Blair earlier. This year, we have developed the capability to flex our annual northern white capacity from $5 5 million tons to 10 million tons, thus, adding $4 5 million tons of capacity for a very low acquisition cost of approximately $9 million.

We brought $1 6 million tons of that flex capacity online in late 2020, when we opened our Utica facility where.

We're actively evaluating the timing of opening the Blair facility and expect to have additional information on this on our year end earnings call in March this incremental capacity strategically positioned smart sand and take advantage of the growing market demand for northern white sand.

Our reserve base is primarily finer mesh sands.

To meet the long term needs of the market our facilities, our low cost efficient operations that allow us to operate effectively through all market cycles.

Our growing industrial sand solutions business. This business segment continues to grow rapidly diversifying our business with strong margins.

Thanks, Chuck now I'll go through some of the highlights of the third quarter, starting with sales volume.

We sold approximately $1 million 110000 tons in the third quarter, a 7% decrease over the second quarter volumes of $1 million 196000 tons.

Volumes during the third quarter were slightly lower sequentially due primarily to the timing of well completions by some of our customers' overall activity levels continue to be at high levels.

Revenues for the third quarter, 2022, or <unk>, $71 6 million compared to $68 7 million in the second quarter.

Total revenues were higher in the third quarter due primarily to continued improvement in average sales prices of our sand increased utilization of our smart systems fleet.

$2 7 million in contractual shortfall revenue.

Our cost of sales for the quarter was $60 2 million compared to $59 7 million last quarter remaining relatively consistent period over period, but nothing significant to call out.

Total operating expenses were basically flat at $7 $7 million in the third quarter compared to $7 6 million last quarter.

Net income was $2 7 million for the third quarter or <unk> <unk> per basic and diluted share compared to a net loss of 90000 or zero cents per basic and diluted share for the second quarter 2022.

For the third quarter of 2020 to contribution margin was $17 8 million and adjusted EBITDA was $11 3 million compared to second quarter contribution margin of $15 3 million and adjusted EBITDA of $9 2 million. The increase sequentially was primarily due to shortfall revenue recognized in the third quarter.

For the third quarter contribution margin per ton to $16, one per ton compared to $12 75 per ton last quarter.

Okay.

For the third quarter 2022, we generated $10 8 million in net cash provided by operating activities, leading to $6 4 million and free cash flow. After we spent $4 4 million on capital expenditures.

During the third quarter, we drew an additional $3 million on our revolver and ended with $6 million outstanding on our facility.

We ended the quarter with approximately $10 4 million in cash and cash equivalents between cash and our availability on our facilities. We currently have approximately $23 million in available liquidity.

Lee due primarily to timing of completions activity shifting from this year into 2023, we.

We expected adjusted EBITDA to be positive in the fourth quarter, but it will likely be lower than third quarter results as we will not recognize any shortfall revenue in the fourth quarter.

For the for year 2022, we expect to have record sales volumes for the company.

We believe our contribution margin per ton.

We remain in the double digit range in the fourth quarter.

We still expect capital expenditures for the year to be in the $20 million to $25 million range, which includes capital expenditures.

And the acquisition of the Blair facility earlier in the year.

This concludes our prepared comments and we will now open the call for questions.

Thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from Stephen <unk> from Stifel. Your line is open.

Thanks, Good morning, everybody.

Good morning, Steven.

Two questions from me. The first can you give us your perspective currently on the supply demand fundamentals for Frac sand as we as we look out into 2023.

Yes, sure David So.

Right now northern white supply and demand fundamentals continue to be positive demand appears to be growing a little bit, particularly in the Appalachian basin, primarily a gas drilling.

Drilling market, we expect the Bakken the western basis remained steady.

Other than seasonal fluctuations due to potential weather here in the fourth quarter and first quarter.

We're not seeing a lot of northern new northern white sand supply come back online.

Some pockets of incremental supply.

But with some of the capital constraints out there.

And of course, the reserves of most of the idle mines with the inefficient processing that that yields.

We don't see much if any of that capacity returning.

Current pricing and margin levels.

The only other thing I'd add is yes.

This year has kind of been the first time in a long time for as long as I can remember that we've seen both high commodity price on Nat gas and oil and so those two things are.

Generating.

Great. Thank you.

Thank you you mentioned.

I believe double digit contribution margin per ton in the fourth quarter.

Thats.

Yes.

Pretty strong number given I think what is normal normally some cost some winter costs.

Cost of goods sold increases can you just kind of is that driven by just the efficiency of the system and the price dynamics you've seen over the last.

Over the last year.

<unk> allows you to.

Hold it at that level.

A soft.

A softer fourth quarter.

Yes, Stephen I think a couple of things are driving that we're seeing.

And we're guiding to volumes have been relatively consistent in the fourth quarter versus typically we have a little bit of a drop also slowing us.

So all of our fixed cost.

Little better in the fourth quarter, we normally do.

And so that's helping and then also we're seeing pricing I think kind of stabilize at current level. So we see kind of pricing remaining at good levels. So the combination of having.

Consistent volumes in the fourth quarter versus more of a drop off than we've seen in the last couple of years, coupled with a good pricing environment I think that leaves us to feel confident that will be.

In.

<unk> margin per ton levels that you saw in the second quarter in the third quarter.

Even backing out the shortfall revenue for the third quarter number.

Great. That's helpful. Thank you for the color.

Thank you and we have a question from.

One moment.

Yes.

Brian Shea Lee with exploit investing your line is open.

Hi, there. Thank you for having me on.

First.

Do you still next quarter expand in any given quarter. For example that you felt like quarter for staying in quarter three.

Excuse me did we sell what.

Next quarter standing in any given quarter.

For example, like in quarter.

<unk> quarter for us and in quarter, three and does that differ when you have contracts.

I'm not sure I understand your question, we sell sand based on the.

Activity in each quarter and those volumes get booked in that quarter. So there.

<unk> sales, we have in Q3 or from volumes, we sold in Q3 and whatever sales we have in Q4 et cetera from volumes, we sold in Q4.

Okay. Thanks.

The question was basically.

Like do you actually sell the sand.

Like have you actually increase the number of.

People you have on contract. So are you able to see into the next quarter, how much volume you could possibly have.

And have you actually increase the number of people you have on contract.

Yes, we've added a couple of smaller contracts and so we don't disclose actual the percent of contracts, we have outstanding but we have added.

Couple of smaller contracts.

We will have volumes associated with them starting in the fourth quarter and first quarter next year.

But.

Okay. Thank you.

Just one more here.

Your stock is currently trading at an enormous discount to our net tangible asset value.

And into next year are you looking at possibly implementing an aggressive shareholder return program.

I think thats something we will continue to evaluate right now is.

You saw in our numbers, we've got to positive free cash flow this quarter and we.

Co-pay being able to kind of continue that trends and once we see and are confident in terms of our cash flow being consistent and being positive cash flow then we will evaluate.

Alright, thank you.

Thanks, Brian Thank you.

Thank you and Thats all the questions I've had like to turn the call back over to Chuck Young for any closing remarks.

Thank you for joining us today, we look forward to talking with you again in March.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2022 Smart Sand Inc Earnings Call

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